Specific economic policies for Britain

Press, 11 May 1979, Page 14

Specific economic policies for Britain

By

SIR GEOFFREY HOWE

Living standards and production in virtually every other Western country have gone up in the last five .years. But in Britain, not at all. Putting North Sea oil and gas to one side, Britain is actually producing 5 per cent less than five years ago. The consequences of failing to arrest this industrial decline are likely to become more serious as time goes by. It is vital to understand that this is not a party political judgment. This is why we endorse the recent opinion of the Bank of England that the British people, “now condemned to very slow growth . . . might later even have to accept, if present trends continue, declines in real living standards.” We intend to see that the present trends do not continue. And we offer specific policies to improve our economic performance. Others may disagree with our proposals. But they are honest, . courageous and coherent. First, taxation. I am convinced that at the heart of our decline is a system of taxation which punishes work, skill, saving and enterprise. This is not, of course, the sole cause of our national economic failure. But tax is something that Government clearly is able to transform. Until it is changed, we have no hope of reversing our decline. We certainly do not intend to turn the system upside down with new, complex legislation. The crucial point to tackle is the high marginal rate of personal income tax throughout all income levels. Most British taxpayers lose 39.5 per cent of every extra pound they earn. In Germany, a married man

with two children would not begin paying this marginal rate until he was earning more than £3OO a week; in France, he would have to be earning £BOO a week. In Britain, the 39.5 per cent rate is reached on an income of £4B a week. For managers, skilled workers and entrepreneurs, the differential is, of course, even worse. It is absurd to retain a system which drives talent abroad (5 per cent of our population have emigrated during the last decade), puts a premium on leisure and is increasingly regarded with contempt by moonlighters and taxfiddlers. We are therefore committed to substantial cuts in income tax — at all income levels. We shall raise, and raise substantially, the level at which people start paying income tax. We shall cut, and cut substantially, the basic and the higher rates of income tax. Our manifesto commits us to bringing the top rate of tax on earned income down to the European average of about 60 per cent. Our present capital tax structure is almost equally hostile to enterprise. We are, therefore, also committed to reforming capital gains tax, so that it no longer falls on purely paper gains. Reductions in income tax, across the board, must, at least initially, involve a substantial loss of Government revenue. How is this to be financed, particularly when we shall have inherited from Mr Healey a public sector borrowing requirement that is. as it has been throughout the last five years, far too high? We are determined to

reduce the scale of public borrowing to a level which is consistent with monetary and fiscal prudence and discipline — which means public sector borrowing of less than Mr Healey’s proposed £B5OO million for the

current year. Further progressive reductions will enable monetary targets to be similarly reduced. This is why the reduction of unnecessary public expenditure is an equally

crucial second part of our strategy. The socialists continue to shriek that “Tory spending cuts will cause massive unemployment.” They forget their own experience. In 1976, the International Monetary Fund obliged Mr Healey to cut spending by nearly £2OOO million. In the event, it fell by £3OOO million. What happened? Interest rates fell. Sterling strengthened on foreign exchanges. There was some room for tax cuts. And unemployment started to fall. Mr Healey’s current fearmongering about our plans should be judged by what he actually said on the day when he announced the I.M.F. cuts: “The measures that I have announced this afternoon will generate more jobs than they remove.” This was one of Mr Healey’s predictions that was not falsified by events. Since sensible reductions in public spending in fact improve the chances of improving worth-while employment opportunities, jobs that will endure, we are proposing economy in three main areas: socialism, waste, and subsidies that are counterproductive. Labour’s plans for further nationalisation — of the land, of rented housing, of specific industries and through the National Enterprise Board — could cost £5OOO million during the next five years. Waste, in one single year of Government spending, has been estimated by the chairman of the all-party Public Accounts Committee as amounting to £lOOO million. There is inefficiency and over-manning in much of the public sector. One other area with obvious scope for economy is in the indiscriminate subsidisation of trade and industry. There is, of course, a strong case for helping regions, industries and individuals to adjust to

economic change. But some expenditure of this kind bears little relation to the number and nature of jobs which are "created” or maintained. So significant economies can be made without reducing the effectiveness of these policies. Recent American experience shows that twothirds of their new jobs come from firms employing less than 20 people, fourfifths of them from businesses that are less than five years old. Britain’s tax and subsidy structure must be redesigned so that it operates in the same way. Once smaller firms are revitalised, the need to protect and preserve declining firms and industries is much reduced. Nevertheless, income tax cuts on the necessary scale, coupled with a reduction in Government borrowing, must exceed the savings that can be achieved, particularly in the short run, from more sensible management of public expenditure. This is why the third part of our strategy involves candid exposition of the fact that a larger share of our total tax burden should fall on some forms of expenditure rather than on earnings, savings and enterprise. We are fully aware of the need to protect the weaker groups in society under all circumstances. When we introduced Value Added Tax, we ensured that it did not fall on the basic necessities: food, public transport, fuel, housing, children’s clothes and shoes. And with our indexing of pensions and similar benefits, account is taken of price increases. All this adds up to a programme which can revitalise our declining economy, provided we are determined to see that lower income tax is accompanied by the necessary reduction in Government borrowing.